Legislative Update on Pensions by Rep. Rick Rand Sept. 11, 2017

September 12, 2017

FRANKFORT — Kentucky’s state pension systems are underfunded by at least $33 billion right now, leaving us among the worst funded retirement systems in the nation.

Legislation passed in both 2008 and 2013 changed benefits for those hired in recent years, but those adjustments have not yet had enough time to meaningfully affect the overall health of the systems. The $1.28 billion that we put into both the KRS and the separate Kentucky Teachers’ Retirement System (KTRS) in 2016 affirmed our commitment from 2013 to fully fund the actuarially required contributions necessary to putting the systems on a path to sustainability, but it is clear that additional funding will be necessary.

Recently, the PFM Group, a consultant selected by Governor Matt Bevin’s Finance Cabinet and hired to review and suggest reforms to the pension system, issued the third in a series of reports designed to specify measures it recommends to solve system funding woes. The PFM report recommends significant benefit reductions across all of Kentucky’s pension systems. Lawmakers, and even Governor Bevin himself, have said that the report and the recommendations found in the report are only suggestions. That’s true. The recommendations are not law, and won’t be without the Kentucky General Assembly’s approval, either in special session or regular session.

The PFM report is different from most prior proposals because it would change benefits for current employees and retirees of both the KRS and KTRS systems. Current workers in the KRS’ Kentucky Employees Retirement System (KERS) non-hazardous plan and teachers hired before 2014 would have to wait until age 65 to retire—they could retire earlier but with a reduced benefit. Those hired in 2014 or later would have their pension benefit accounts rolled over in a 401(k) type plan. Cost of living increases, or COLAs, provided to current retirees in all systems from 1996 to 2012 would be eliminated from their monthly benefit checks, reducing their payments by as much as 25 percent going forward.

Current hazardous duty employees, like police and firefighters and probation officers, who were hired before late 2008 would wait until age 55 to retire instead of the current 20 years of service—although they could retire earlier with reduced benefits. Those hired since would have to wait until age 60 although they, too, could retire earlier for less money.

Changes are also proposed for future hires. Anyone who joins a KRS non-hazardous plan after the PFM proposals take effect (should the General Assembly put the proposals into law) would be placed in a 401(k) type plan and eligible for retirement at age 65. Future teachers would also be placed in a 401(k) plan and would be eligible to collect Social Security based on their earnings as teachers, which they cannot do now. Hazardous duty benefits would stay the same although they wouldn’t be eligible for retirement until age 60 per the recommendations.

Just in the past few days we’ve seen some feedback on specific recommendations. It appears pretty certain that the PFM recommendation to eliminate, or “claw back,” COLAs from current retiree checks will not be part of any proposed legislation. Even the Governor, who has been noncommittal on what should stay or go from the report when it was released, told WHAS Radio that, “Nobody…thinks that we should be clawing back pay adjustments—COLAs as they are called—from retirees.” More feedback is expected in the coming days.

What everyone can agree on it that the current pension situation is not a good one for retirees, current employees and teachers, or the state. Adjustments to benefits for future employees may be necessary in acknowledgement of fiscal realities and in recognition of what is now more typical for post-employment benefits provided workers in both the public and private sectors. But if we overstep, we risk violating state law—known as the state’s “inviolable contract” between the state and its employees and retirees. We also risk violating the “moral obligations” (to use the Governor’s own words) which we have made to those who have earned their retirement in service to us all.

I will explain the inviolable contract as it relates to Kentucky and how attempts by other states to alter their pension systems have fared in next week’s column. Have a good week, and we’ll talk soon.

State Rep. Rick Rand represents the state’s 47th House District in Carroll, Gallatin, Henry and Trimble counties.